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FINANCIAL PLANNERS and advisers find themselves on their own, trying to figure out how to describe their services accurately and how to play fair. Many follow the lead of their professional organizations in simply describing a financial planner as a person whose business is personal financial planning. While federal and state regulations are often excruciatingly more specific, they may not agree.

Not only is it hard to define who is a financial planner, it is difficult to determine what laws and rules apply to the profession.

Unfortunately, there is no significant body of law to use as guidelines regarding standards for financial planners and advisers. Because the financial planning profession and the statutes regarding the profession are so new, few cases have been tried under these laws; fewer still have been appealed and therefore reported as authority.

To protect your practice, you need to be aware of the nuances various legal entities and professional organizations incorporate in their definitions of what constitutes financial planning activities and who qualifies as a financial planner. In general, the various definitions are anchored in one of two basic precepts: “holding out” (i.e., title used) or “in the business” (i.e., services provided). As explained below, the federal government, the various state governments, and your own professional organizations are not consistent in which approach they use.

SEC Definition

AT THE FEDERAL LEVEL, the SEC uses the services provided approach to define financial planning in these terms:

Financial planning typically involves providing a variety of services, principally advisory in nature.. regarding the management of.. financial resources based upon an analysis of individual client needs. Generally, financial planning services involve preparing a financial program for a client based on the client’s financial circumstances and objectives. This information normally would cover present and anticipated assets and liabilities, including insurance, savings, investments, and anticipated retirement or other employee benefits. The program developed for the client usually includes general recommendations for a course of activity, or specific actions, to be taken by the client. For example, recommendations may be made that the client obtain insurance or revise existing coverage, establish an individual retirement account, increase or decrease funds held in savings accounts, or invest funds in securities. A financial planner may develop tax or estate plans for clients or refer clients to an accountant or attorney for these services.

“The provider of such financial planning services in most cases assists the client in implementing the recommended program by, among other things, making specific recommendations to carry out the general recommendations of the program, or by selling the client insurance products, securities, or other investments. The financial planner may also review the client’s program periodically and recommend revisions.8

To summarize, the SEC defines a financial planner as a person who does business in the following manner:

• Provides advisory services regarding the management of financial resources

• Provides analysis of individual client needs • Prepares a financial program based on the client’s financial circumstances and objectives, including:

– present and anticipated assets and liabilities

– insurance

– savings

– investments

– retirement and employee benefits.

The SEC staff believes most financial planners also:

• Provide special recommendations for client action

• Assist the client in implementing the recommendations

• Periodically review the program and recommend revisions.

State Definitions

STATE DEFINITIONS OF financial planners vary considerably and utilize either or both of the two basic precepts: holding out and in the business.

Maine seems to use both the holding out and the in the business concept by defining a financial planner as “a person who provides a variety of services, principally advisory in nature, to consumers with respect to management of financial resources based upon an analysis of individual consumer needs.” 9 Under this definition, “financial planner” includes, but is not limited to, persons “who designate themselves financial analysts, advisers, consultants or planners, financial management advisers, securities or investment analysts, estate planners or other such terms.”

Maryland, on the other hand, uses only the holding out definition. It requires all who hold themselves out, among other things, as “financial planners” to register as investment advisers.10

Minnesota also uses a holding out approach, and its regulations and statutes incorporate a very broad definition. In this state, a financial planner is any person who indicates he or she is a “financial planner, financial counselor, financial adviser, investment counselor, investment adviser, financial consultant, estate planner, or any other similar designation.”11 Thus, financial planners are all who hold themselves out using one of these magic words on their business cards, letterheads, signage, or yellow page advertisements.

Some years ago, a large brokerage firm in Minnesota took the position that its registered representatives were stockbrokers and did not provide financial planning services. As a result, the firm did not consider them financial planners. This analysis may have been correct under SEC regulations or the IAFP’s definition discussed below. However, those definitions did not apply to the state’s law. Because the brokerage firm was calling its registered representatives financial consultants, the Minnesota Department of Commerce found those representatives were indeed financial planners, whether or not they actually did financial planning. Not only were these brokers miraculously transformed into financial planners, suddenly they also had a statutory duty to act as fiduciaries rather than just sales representatives. The firm also received a $30,000 fine for failing to provide certain paperwork to its clients, another state requirement of financial planners.12

The vast majority of insurance agents in Minnesota believe they are plain-vanilla life insurance agents. However, almost all of them provide estate planning services. After all, the two purposes of insurance are to build an estate and to preserve an estate. It would make sense that anyone selling this kind of insurance would be an estate planner. However, “estate planner” is a magic phrase under the Minnesota definition of financial planners. Most life insurance agents are surprised to find they are considered to be financial planners because they do estate planning.

Although Minnesota life insurance agents often find themselves classified as financial planners under their state’s specific law on that subject, those living elsewhere should be aware that their state’s insurance laws may also define financial planning. Generally, these statutes describe whether or not an agent qualifies as a financial planner.

What about persons who do not practice financial planning but have the designation “Certified Financial Planner,” “Chartered Financial Consultant,” or “Personal Financial Planner” even if they are not actually in the business of planning? One might argue that any one of these titles makes them a financial planner in Maryland even though they are not actively in the business of doing planning. That is the interpretation made by Jacqueline H. Hallihan, President, and Robert Stirling, Associate, of National Regulatory Services, Inc.13 According to them, two states, Maryland and Washington, have gone further than the SEC and have stated that simply using the CFP licensee designation after one’s name is “holding one’s self out” as providing investment advice.14

What are the laws in your state? It can make a big difference in how you practice your profession. Call or write your state departments of securities and insurance to request a copy of their statutes and rules on financial planners and advisers. Specifically ask them how they define financial planners and whether there are any special legal requirements. You might be surprised to discover how your state departments of securities or insurance define the term “financial planner.”

Industry Definitions

GIVEN THE DISPARITY IN legal definitions of financial planners, it is not surprising that consumers are confused. As Bill E. Carter, President of Carter Financial Management, Inc., sums up the situation, “Many consumers cannot distinguish what it is that makes someone a financial planner as opposed to another type of financial services provider.”15 This confusion is not good for the profession.

In an attempt to clarify these issues, the IAFP established this definition: “[t]he financial planning process involves assessing an individual’s current situation and setting financial and personal goals before implementing financial decisions. It includes identifying financial problems and providing a written plan. The final steps involve implementing the plan and periodically reviewing and revising it.”16

The IAFP also holds “[a] financial adviser is a financial services professional who helps people achieve their financial goals based on their individual condition, resources and capabilities. IAFP encourages advisers to use the financial planning process.”17

The CFP Board of Standards, on the other hand, defines financial planning as “[t]he process of determining whether and how an individual can meet life goals through the proper management of financial resources.” It defines the “financial planning process” as typically including, but not limited to, “the six elements of data gathering, goal setting, identification of financial issues, preparation of alternatives and recommendations, implementation of client decisions from among the alternatives, and periodic review and revision of the plan.”18

NAIC takes a much broader approach and declares a financial planner is an individual who has competence and expertise in numerous financial products and their legal framework.19

DILEMMA

A FEW OF US are old enough to remember a popular television show in the fifties and sixties, in which people would stand on a stage while four astute panelists would have to deduce what they did for a living. Now picture if you will the Financial Planner Game. Four people are standing on a stage. While they are all in the financial services industry, they are not all financial planners. You as a panelist must decide who the financial planners are.

• SUSIE STOCKBROKER is a registered representative for a large brokerage firm. She also has an insurance license. Susie specializes in clients over the age of 60 and emphasizes municipal bonds. Her business card reads: Registered Representative, Life Insurance Agent.

• LARRY LIFE INSURANCE SALESMAN is an agent for a large insurance company, who occasionally brokers with other companies. He specializes in buy-sell arrangements. His card reads: Insurance Executive.

• IVY INVESTMENT ADVISER has securities and insurance licenses and is a registered investment adviser. She charges a fee for services and specializes in pension benefits. Her card reads: Pension Consultant.

• CHARLIE CPA has no insurance or securities licenses and is not a registered investment adviser. He advertises himself as a financial planner who specializes in estate planning and tax reduction strategies. His card reads: CPA, Estate, Tax, and Financial Planning.

Question: As a panelist, how many of the four do you believe should remain seated because they are financial advisers and not really financial planners? As they would say on the old TV program, “Will the real financial planner please stand up?”

Answer: Charlie CPA stands up. Although on the surface Charlie looks like a regular certified public accountant, his business activities need to be analyzed more carefully. There is no question that providing tax reduction strategies is part of the business of being an accountant. What about his financial plans? If his activities fit into the definition established by the SEC, he is also a financial planner on the federal level. In many states, merely by holding himself out as a financial planner as he did on his business card, he becomes a financial planner whether he is actually doing planning or not. In this case we know that Charlie is indeed doing planning and he is holding himself out as a planner. Consequently, Charlie, much to his surprise, is more than a CPA; he is also a financial planner.

Susie Stockbroker remains seated because she holds herself out as a registered representative and insurance agent who does no planning. If Susie was performing planning activities as defined by the SEC or state laws, she would be legally labeled a planner no matter what she calls herself.

Larry Life Insurance Salesman can use the same analysis as Susie and remain seated. Does Larry do financial planning as defined by state law or the SEC? Larry is not doing detailed written asset allocation models or estate planning projections. Instead, he simply analyzes the buy-sell arrangement and makes an insurance recommendation.

Ivy Investment Adviser’s registration as an investment adviser will not alone make her a planner. It is true she does have to be registered in order to charge for investment advice, but is she a planner under the SEC’s definition? If she is limiting her advice to pension plans, but not performing planning as defined by the SEC, she is not a financial planner. Ivy, who thought she was a financial planner, may feel a bit bewildered, but should remain seated too.

One of the things that made those old television shows so enjoyable was how challenging it was to choose the correct person. Although the challenge may be great fun for game shows, it is not much consolation to a financial planner who is trying to practice ethically and legally.

It is sometimes extremely difficult for even experienced professional compliance officers to determine whether a person is a financial planner or a product salesperson. The following test has been created to help you determine your status. It utilizes a three-tier concept. The first tier consists of insurance agents and registered representatives who give product advice and are compensated by commissions. The second is comprised of investment advisers whose service goes beyond product information and includes ongoing portfolio management and advice. These people are typically compensated by charging a fee for assets under management, although some may charge an hourly rate or flat fee. They may also receive commissions on specific product recommendations. The final tier of service is provided by financial planners, who may be compensated by fees, commissions, or both. In addition to asset management, financial planners provide a detailed strategy for achieving financial goals.

Financial Planner Test

First Tier

1. Do you limit your business to advice about securities and/or insurance, and all of your compensation is commission based?

________YES _________NO

If yes, go to next question. If no, go to 3.

2. Do you call yourself a registered representative, insurance agent, or some other financial professional term other than “financial planner?”

________YES ________NO

A yes answer here does not automatically mean you are only a registered representative, insurance agent, or other financial adviser. Go to next question.

3. Do you refrain from calling yourself a financial planner?

________YES ________NO

If no, this does not automatically make you a planner. Go to next question.

4. Do you limit your advice on insurance and securities to the traditional subjects covered by brokers and agents?

_________YES __________NO

If you scored four yes answers here, you can be comfortable with a registered representative or insurance agent label.

Second Tier

5 Do you give advice about securities for which you are compensated by a fee?

__________YES __________NO

No matter what your response, go to next question.

6 Does your advice about securities go beyond that of a typical broker?

__________YES __________NO

A yes answer to either 5 or 6 will make you an investment adviser who needs to be registered with the SEC and most states. You are still not necessarily a financial planner.

Third Tier

7 Do you perform the business of planning as defined by the SEC?

__________YES __________NO

If yes, you are a planner for the purposes of the SEC and many states, no matter what you call yourself.

8 Do you hold yourself out as a planner, using it as a marketing tool, but really function as a registered representative, insurance agent, or pension consultant?

__________YES __________NO

If yes, you may trigger financial planner status in some states where they have a holding out or title statute to define a financial planner. This holds true even if you gave a no answer to 7.

TO FURTHER DETERMINE if you are a financial planner, take the following two steps. First, look at your business activities, comparing them to SEC Release IA- 1092. If your activities match the definition, you are a financial planner. Second, if you are not providing financial planning, look to your state statutes and rules for a holding out provision. You may be a planner just because you hold yourself out as one.

If you are indeed a planner, and this may be a shock to some financial advisers and professionals, you might as well call yourself one. You will be bound by the rules affecting planners regardless of how you label yourself. This will put you squarely under the SEC and state rules and regulations, which endeavor to make sure the public is not misled. Consequently, the SEC staff and state securities departments smile upon financial advisers who give fair and honest disclosure about their true business activities.

If you cannot tell if you are legally a planner, get a written opinion from your insurance company’s home office, broker-dealer, or an attorney who specializes in this area. In some cases you may want to contact the SEC or your state securities department directly for a no-action letter to clarify your position.

Finally, if you are not providing planning services, do not call yourself a planner: it may trigger unnecessary rules, requirements, and obligations.